Weak demand, margin outlook to keep Balkrishna Industries under pressure

Tyre-maker's challenges include excess inventory, muted demand in agriculture sector

The stock of Balkrishna Industries, India’s largest tyre-maker by market capitalisation, slipped 10 per cent on Monday due to weak December quarter results and near-term pressure on volume margins.

Mark-to-market loss on foreign currency borrowings in the December quarter to the tune of Rs 166 crore also dented the bottom line, which fell 70 per cent year-on-year (y-o-y) to Rs 100 crore. Volumes for the company, which makes off-highway tyres (OHT), slid by 15.7 per cent on a sequential basis to an eight quarter low of 66,480 metric tonnes (MT).

While brokerages expected the company to report a 5-6 per cent decline to about 74,000-75,000 MT, the fall was steeper. The company’s management said there was excess inventory in the OHT and other tyre segments. In addition to inventory destocking, seasonality in key markets impacted volumes too.

Inventory level in the September quarter was at three months (90 days) and it is now down to two and a half months. Balkrishna said the ideal level is 45 days and it could reach there gradually as retail demand continues. “We continue to face challenges of de-stocking in Q4. However, the intensity of the situation is receding on a month-to-month basis. The situation has been relatively better in North America. However, recession fears can continue to impact demand. India continues to be stable supported by a better economic environment,” said Rajiv Poddar, Balkrishna’s joint managing director.

Demand from the agriculture segment remains muted, while the industrial/construction business is in better shape. Basudeb Banerjee, an analyst with ICICI Securities, said in a recent report that momentum in the agriculture segment remained subdued as industry exports to the European Union declined by 26 per cent y-o-y in revenue terms in November. Overall agriculture tyre exports were down 4 per cent y-o-y. Agriculture exports are up 7 per cent y-o-y, driven by strong growth in the US and rest of the world.

In addition to demand trends, the street will keep an eye on Balkrishna’s realisations and margins. Average selling prices were down 3.3 per cent sequentially due to a lower surcharge to end customers. The metric now accounts for 9 per cent of sales as compared to 14.2 per cent in the June quarter of FY23.

While lower freight costs was a positive from the profitability perspective the same was negated by raw material costs. Amid lower volumes and weak operating leverage, gross margins were down 540 basis points y-o-y (-240 points q-o-q) to 47 per cent which is at multi-year lows, according to YES Securities.

Reported operating profit margins were lower by 530 basis points y-o-y to 19.1 per cent. In addition to the lower top line, higher promotional expenses also dented margins.

The company highlighted that margins should improve by 300 basis points in the coming quarter, led by lower raw material costs and higher volumes. A lot will depend on how competitors react to the fall in raw material prices and thus the company remains non-committal about when it could reach its target margin band of 28-30 per cent. For FY24, the company expects lower raw material and freight costs, better hedge rate and market demand will lead to margin recovery.

At the current price, Balkrishna’s stock is trading at 23 times its FY24 earnings estimates. Investors should await volume and margin trends over the near term before considering the stock.